Does the $8,000 First-Time Home Buyer Tax Credit Discriminate?

Last Updated Oct 14, 2009 12:29 PM EDT

Does the $8,000 first-time home buyer tax credit discriminate based on income? One MoneyWatch.com reader thinks so. Ann sent me the following email:

Is there any avenue to file a complaint against the government for discrimination related the $8,000 new home buyer tax credit? The complaint is based on income relative to cost of living/cost of housing. If I were to have my current job in a state other than California, in a city other than Los Angeles, my income would be lower and I would qualify. Additionally the home I might buy in this "other" state/city would cost relatively less. I bought a modest condo, and not in a "great" real estate area. I am a first-time homeowner in a wildly high real estate market. The $8,000 tax credit would have saved me from a huge tax hit next year. It seems to me I am "exactly" the person this stimulus package was meant to help. Just wondering if I have any options. Ann: Since I have been blogging about the $8,000 first-time home buyer tax credit, MoneyWatch Editor in Chief, Eric Schurenburg asked me to respond to your question.

Let's start at the beginning: Congress passed the Housing and Recovery Act of 2008 that created the $7,500 repayable first-time home buyer tax credit. which functions more like an interest-free loan since it required taxpayers to repay the credit in $500 installments over 15 years, or when the house was sold.

The American Recovery and Reinvestment Act of 2009 made changes to the tax credit, including increasing the amount to $8,000 and eliminating the repayment requirement. The original legislation included an income cap - which seemed appropriate to members of Congress beacuse they wanted to aim the legislation specifically at first-time home buyers, but not first-time home buyers who were doing particularly well financially. Because the legislation was a federal effort, the tax caps weren't geographically targeted.

(There is some precedent for changing numbers geographically. Over at the FHA. part of the Department of Housing and

Urban Development. the mortgage amount you can finance with an FHA loan does change depending on where you live. And, median income varies regionally as well.)

But when you're doing fast legislation, that kind of stuff tends not to happen. And, there is also plenty of precedent for including a flat income cap. For example, tax brackets are flat and IRA contributions are capped at a certain amount, no matter how much you earn. And, for reasons that continue to befuddle the senses, if you earn too much, you can't contribute to a Roth IRA. See IRS Publication 590 Individual Retirement Arrangements (IRAs) for details.

The original legislation proposed a $15,000 tax credit for all home buyers. regardless of income. And, Sen. Johnny Isakson (R-GA) has continued to press for an extension and expansion of the current $8,000 tax credit in order to boost the total amount of the credit and make it available to everyone, even millionaires.

He would like to see everyone who wants to buy a house to live in get the tax credit. I think he's being overly generous with my tax dollars, although his point is that then it applies to everyone - well, everyone who has the cash, credit, and enough mental bandwidth to buy and manage more real estate.

If you want to complain, call your Congressional representatives and urge them to pass Sen. Johnny Isakson's legislation. Who knows? You might still be able to qualify for the higher amount when you file next year's tax return.

For All First-Time Buyers:

The clock is ticking - while the $8,000 first-time home buyer tax credit expires on November 30, 2009, if you haven't found the house you want to buy, and negotiated the price and begun the process of financing and closing on the property by September 30 - just 9 days from now - you might not have enough time to close.

And, if Congress doesn't at the least extend the current legislation (which I consider to be the most likely outcome), you'll miss the boat.